22/12/18

RUPEE GAINS, GLOBAL EQUITY INDICES WEIGHED DOWN BY FED

Highlights:

-GLOBAL and INDIAN MARKET DEVELOPMENTS

-DATA HIGHLIGHTS AND FX MARKET DEVELOPMENTS

–TECHNICAL

-STRATEGY FOR HEDGING AND SUGGESTED PORTFOLIO

-DATA AND EVENTS FOR NEXT WEEK.

Major economic events:

-Rupee gains as Crude decline accelerates.

-Fed’s rate hike dampens Global Equity market sentiment.

Important developments during last week:           Rupee closed at 70.17, gain of 2.4% as compared to prior week close of 71.90. USDINR volatility remained elevated. FII’S continued to invest in Equity and debt markets in Nov. Crude Oil prices and FII flows continue to swing Rupee either way. Though Indian Equity markets rallied till Thursday despite Global meltdown in Equities, it corrected lower on Friday. Govt has decided to infuse fresh capital into PSU banks and it is expected that 3-4 banks may move out of PCA norms. GST council is expected to reduce rates on some items.

FII’S have bought Rs 3593 Cr of Indian Equities in Dec . FII’S have bought Rs 3181 Cr of Indian debt securities in Dec till date . On a cumulative basis, FII’S have sold Rupees 23706 Cr of Indian Equities till date for this calendar year and have sold  Rupees 53112 Cr of Indian debt in this calendar year till date.                                                                         

Global developments: The week was dominated by Fed decision and Crude Oil decline. Global stock market volatility and price decline accelerated due to fears of impact of excessive rate tightening by Fed on future growth prospects. Fed was not sufficiently dovish to instill confidence in risky assets, though FX market reaction was muted. Yield curve flattening raised fears of significant slow down in 2019/2020, though present economic data stands contrast to equity markets meltdown and yield curve inversion. US President is very unhappy with Fed decision and further rate hikes in 2019 may jeopardize the Fed Chairman’s position.

Fed increased the target range for its benchmark interest rate by 25 basis points to a new band of 2.25%-2.5%, putting the Fed funds rate at its highest level since the spring of 2008. All ten voting members of the FOMC voted in favor of Wednesday’s decision. Fed pointed to a labor market that has “continued to strengthen” and economic activity that is “rising at a strong rate.” The Fed did note the slowdown in private investment seen over the last several months, saying “business fixed investment has moderated from its rapid pace earlier in the year.”       

FOMC projections show that Fed may hike rates only twice next year, as neutral rate is close to 2.8%. The overall impression is that Fed is nearing end of rate hike cycle.

BOE voted 9-0 to leave the Bank rate unchanged at 0.75% in December. The committee also voted unanimously to leave the asset purchase program at 435B pound .It has turned more cautious than November, warning that Br-exit uncertainty has “intensified considerably” since November.

Japanese cabinet office lowered 2018 growth to 0.9% from 1.5% and 2019 growth to 1.3% from earlier estimate of 1.5%.

Crude declined further as US crude production rose. Sluggish Global demand and lack luster OPEC production cut continues to drag Oil lower.         

IMF official indicated that US-China trade war is already having an impact on business confidence and investment in Asia. And there could be global growth forecasts downgrades in the next update in January. In particular, he said Japan and South Korea could be among the those hardest hit due to reliance on exports to China.

Important developments for next week: No major event.

Important levels to watch for are: 1) EUR/USD: 1.12 on the downside and 1.15 on the upside. 2) USD/INR Supports: 69.50 on the downside and 70.70/71.50 on the upside.

Market developments:

-Indian Nifty closed at 10754.

-Gold closed at 1258 and WTI Crude closed the week at USD 45.40.

-Indian 10 Year G-SEC closed the week at 7.28%. US 10 Year Yield closed at 2.79%.   

Data Highlights of last week:

-US building permits climbed to 1.33m and housing starts climbed to 1.26mn.

-US NY mfrg index dipped to 10.9.

-US existing home sales climbed to 5.32 m.

-US weekly jobless claims dipped to 214k and Philly Fed mfrg index dipped to 9.4.

-US durable order climbed 0.8% m/m, personal income grew 0.2% m/m, spending climbed 0.4% m/m and Core PCE index declined 0.1% m/m.

-EU CPI dipped to 1.9% y/y.

-German Ifo survey dipped to 101.

-UK CPI climbed 2.3% y/y, RPI climbed 3.2% y/y and PPI(output) climbed 0.2% m/m.

-UK retail sales climbed 1.4% m/m and  GDP climbed 0.6% q/q.                                  

Technical: USD/INR : Spot closed below 20,50 and 100 day moving averages but still above 200 day major moving average. 20 day moving average   is at 70.82. 50 day moving average is at 72.17. 200 day moving average is at 69.10. Daily MACD is in sell zone, implying top at 72.45. Important support zone is at 69.50.

EURO/USD: The pair is below major moving averages. Next Major resistance is at 1.1500 and later at 1.1620. Major support is at 1.1260/1.12. Daily MACD is in buy zone, implying an important bottom at 1.1270. Weekly MACD is in sell zone, implying important top at 1.1805.

GBP/USD: The pair is below 200 day moving average.Trend is bearish in daily chart. Daily MACD  is in buy zone, implying important bottom at 1.2480 and weekly MACD is  in sell zone, implying important top at 1.3298. Important resistance is at 1.27 and later at 1.29. Important support is at 1.2475 and later at 1.2360.

USD/YEN: The pair is above 200 day moving average. Daily MACD is in sell zone, implying important top at 114. Next important support is at 110.80. Important resistance is at  112.20/114.

Suggested Portfolio: 1) Buy USDINR with stop loss at 69.50.             

Strategy for USD/INR:  USDINR payable can be covered from cost angle.              

Hedging suggestion:  Considering the volatility in the markets, suggest hedging of Currency exposures be done from costing/affordability angle.

Currency Map:

Data and Events for upcoming week: US Data: Consumer confidence, House price index, weekly jobless claims, pending home sales and Chicago PMI EU data: UK:  Japan: CPI, unemployment rate and housing starts.